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Bringing Technology to Post Offices and Benefit Payments
FINAL EVALUATION & SELECTION: FINAL EVALUATION TEAM REPORT
Author: Derek Selwood Version: Issue 1.0
Authority: — Derek Selwood 28 April 1996
Reference: © PWKP4-43
Contents Page
1. INTRODUCTION ...... ay 4
1.1. Purpose..... 2
1.2. Summary of Recommendations 2
1,3. Structure of Report . 2
2. BACKGROUND 3
3. EVALUATION OF TENDERS RECEIVED ON 21 MARCH
3.1. Overview .
3.2. Initial examination of tenders.
3.3. Assurance activities...
3.4. Presentations to Sponsor:
3.5. Negotiations with Suppli
4. EVALUATION OF RE-TENDERS RECEIVED ON 22 APRIL......
4.1. Approach taken.
4.2. Assurance activities
5. RESULTS OF THE CONTRACT ASSURANCE REVIEW .
© wo we UYHAL A
6. RESULTS OF THE FINANCIAL EVALUATION
6.1. Introduction .
6.2. Full Life Costs ..
6.3. Supplier Charges
6.4. Attributable Costs.
6.5. Sensitivity Analyses
6.6. Financial Conclusions.......
7. THE VALUE ASSESSMENT AND FINANCIAL RESULTS ..
Ss
QA a asonss
8. OTHER AREAS RELEVANT TO THE EVALUATION...
8.1. Risk Transfer...
8.2. Partnership Capability
9. ANALYSIS AND CONCLUSION .....
S
ceo
10. RECOMMENDATION...
eatin 2
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ANNEX A - GLOSSARY asia
ANNEX B - MEMBERS OF EVALUATION TEAM... soe 24
ANNEX C - DEFINITION OF PRE-ITT HURDLES..... woes 26
ANNEX D - CATEGORISATION OF TENDERS RECEIVED ON 21 MARCH.......csssssssssssseessseees 29
ANNEX E - EXAMPLE LETTER TO SUPPLIERS OF I APRIL 30
i. INTRODUCTION
1.1. Purpose
1.1.1. This is the final evaluation team report, giving:
(a) an account of the evaluation process from receipt of tenders on 21 March; and
(b) the results of the evaluation of the re-tenders submitted on 22 April 1966 in
response to the Invitation to Re-tender (‘ITR’) issued on 16 April.
1.1.2. It is supported by the following:
(a) contract assurance report (PWKP4-40)
(b) value factor report (PWKP4-41)
(c) financial evaluation report (PWKP4-42).
1.1.3. An interim evaluation report (PWKP4-37) was produced in respect of the tenders
submitted on 21 March and was supported by an interim financial evaluation report
(PWKP4-38). The two papers were considered at the Evaluation Board meeting on
19 April; this paper takes account of comments made at the meeting and since.
1.1.4. The Evaluation Board are invited to consider the Evaluation Team’s recommendation
and reach a conclusion as to the award of contract.
1.2. Summary of Recommendations
1.2.1. The team unanimously recommends that if a contract is awardéa;/it should™Be
awarded to Pathway. .
1.3. Structure of Report
1.3.1. Sections 2 to 4 provide an account of the process of evaluating the tenders submitted
on 21 March and the re-tenders submitted on 22 April. Section 2 gives a brief
background to the evaluation, from the establishment of the shortlist to the issue of
the ITT. Section 3 describes the evaluation process up to 16 April, following receipt
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13.2,
1.3.3.
BS
1.3.4.
2.
21.
of tenders on 21 March. Section 4 describes the work done on receipt of retenders on
22 April.
Sections 5 to 8 present the results of the evaluation of the retenders received on 22
April. Sections 5 and 6 provide a summary of the contract assurance and financial
evaluation activities, fuller details of which are given in papers PWKP4-40 and
PWKP4-42 attached. Section 7 provides an account of the Value Factor assessment
(including the assessment conducted after receipt of retenders, detailed in PWKP4-
41) and its interaction with the results of the financial evaluation. Section 8
considers two other areas relevant to the evaluation. Section 9 provides an analysis
of the whole picture in the form of an account of a discussion by senior members of
the Evaluation Team of the main results of the various evaluation activities.
Members may find it helpful to have the following papers to hand when reading the
report:
PWKP4-5 “Use of Value Factors in final evaluation & selection’
Version 3.0 dated 30 November 1995
PWKP4-8 ‘Pre-ITT Hurdles’
Version 2.0 dated 3 January 1996
PWKP4-9 ‘Processing tenders: From receipt to award’
Version 1.0 dated 23 February 1996
PWKP4-4 Principles of Financial Evaluation
Version 2.1 dated 18 March 1996
PWKP4-23 Financial Evaluation Model
Version 1.2 dated 20 March 1996
PWKP4-22 Programme Value Factor Assessment - 7 March 1966
Version 2.3 dated 20 March 1996
PWKP4-33 Programme Value Factor Assessment - 26 March 1966
Version 2.0 dated 19 April 1996
Annex B details the members of the Evaluation Team.
BACKGROUND
Following evaluation of responses to the SSR from five bidders, three suppliers were
shortlisted in July for demonstrations of their proposed offerings and negotiations
leading to agreement of draft contracts.
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+ Cardlink
. IBM
. Pathway
2.2.
2.3.
2.4.
25.
2.6.
3.
31.
3.2.
3.2.1.
Demonstrations and contract negotiations duly took place between August 1995 and
February 1996, and on 29 February ITTs were issued to all three suppliers.
Prior to issue of the ITT (via meetings held on 26 and 28 February), the Evaluation
Board had accepted that these suppliers had satisfied the conditions for issue defined
in paper PWKP4-8 ‘Pre-ITT Hurdles’. This paper had been approved by the
Procurement Board on 21 December 1995 and lodged with the Programme’s lawyers
on 3 January, before consideration of the issue began.
The hurdles included the minimum service requirements acceptable to the sponsors,
the minimum requirements for partnership with POCL and the development of new
business opportunities, sufficient transfer of risk and a number of commercial
aspects. A full description of the hurdles is attached as Annex C. Having cleared
such hurdles, a supplier cannot be excluded from the competition on the grounds of
his performance in these areas unless changes have occurred or new facts come to
light which make clearance of all or any of such hurdles no longer possible.
In November 1995 suppliers were informed of the criteria for tender evaluation, and
that this would be based on both costs and a number of non-monetary “Value
Factors”. During the demonstrations and negotiations the Programme assessed each
supplier’s performance against these Value Factors.
Suppliers’ pre-ITT scores against the factors together with the associated rationale
were lodged prior to receipt of tenders (PWKP4-22, version 2.3, and associated
papers) following review by the Evaluation Board on 14 March, a follow-up meeting
on 18 March and subsequent approval by the sponsors’ senior Evaluation Board
members. (Paras 3.3.6 and 4.2.6 describe the action on Value Factor scores after
receipt of tenders and retenders.)
EVALUATION OF TENDERS RECEIVED ON 21 MARCH
Overview
The process to be followed from receipt of tenders to award of contract is described
in paper PWKP4-9 ‘Processing tenders: From receipt to award’ which was approved
by the Procurement Board and lodged with the Programme lawyers prior to receipt of
tenders.
Initial examination of tenders
Tenders were received from all three suppliers by the deadline on 21 March. Two
suppliers had provided a number of copies with ‘blank’ prices to facilitate the
application of the ‘need to know’ principle to the evaluation. The third supplier had
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not complied with this request, and the prices were therefore blanked out on a
number of copies before the tenders were released.
3.2.2. Legal advice was that, given the uncertainty as to the nature of the bids in terms of
compliance, no evaluation work should be commenced until the tenders had been
reviewed, their categorisation established and a decision taken on the approach. A
team consisting of D Miller, R Albright, K Baines and P Elliott (Bird & Bird) and
facilitated by D Selwood therefore examined each tender in sufficient detail to
establish a prima facie categorisation. Only Baines and Elliott were given access to
priced tenders in view of the potential involvement of the other team members in
reviewing value factor scores.
3.2.3. The review revealed the following (see Annex D for meaning of tender categories):
Supplier Claimed category Actual category
Cardlink = Compliant Non-compliant - other
Cardlink — Non-compliant - variant Non-compliant - other
IBM Non-compliant - variant Non-compliant - other
Pathway Compliant Compliant
Pathway Non-compliant - variant Non-compliant - other
3.2.4. Legal advice was that at this stage evaluation should cover either compliant tenders
only or all tenders and that the ITT letter allowed either course of action. If it
subsequently became clear that, for any reason, a tender could not possibly lead to an
award of contract then the evaluation of that tender could stop. Given that only one
compliant tender had been received, it was decided by the categorisation team (as in
3.2.2) that the interests of obtaining the benefits of competition were best served by
starting evaluation of all tenders.
3.3. Assurance activities
3.3.1. The assurance activities described in PWKP4-9 were carried out, and where
appropriate clarification queries were taken up with suppliers after quality assurance
of the need for the enquiry by CNT and/or the Procurement Team. The results of the
assurance activities are summarised in the following paragraphs.
Technical Assurance
3.3.2. The technical assurance team identified a ‘ntimber of va
and the pre-ITT demonstration/solutions activity,
major issues; some clarifications were necessary and were
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Contracts Assurance
3.3.3. Apart from the compliant tender from Pathway, this activity revealed a large number
3.3.4.
3.3.6.
3.3.8.
of non-compliances across suppliers. Some were inherent in the nature of claimed
variant tenders, but others were outside the scope allowed by the ITT material
relating to variants. The non-compliances were noted in readiness for any
negotiations with suppliers.
Partnership Assurance
The tender material was reviewed against the results of the discussions held with
suppliers during the demonstration/negotiation phase. Some differences were found
in the degree of commitment given. Some clarifications were raised and satisfactory
replies received.
Risk Transfer Assurance
This review was conducted by comparison of the tenders with the ITT position. As
with Contractual Assurance, a number of changes were noted across suppliers apart
from the compliant Pathway tender. Again, some were inherent in the nature of the
tenders but others were outside the scope allowed for variants by the ITT. The
changes were noted in preparation for any supplier negotiations.
Value Factor Assurance
In the course of carrying out the assurance activities the teams noted the need to re-
assess the pre-ITT scores. Formal reviews at Partnership, Contracts and Demo
Stream level were carried out on 25 and 26 March. At the subsequent Programme
review on 26 March, the scores and validity markings were amended for a number of
factors. The results were documented in PWKP4-33, endorsed by the Evaluation
Board on 19 April and taken forward into the evaluation of re-tenders due on 22
April.
Financial Evaluation
The suppliers’ prices were input to the financial model lodged prior to receipt of
tenders and initial runs of the various costing statements produced. In some
instances assumptions had to be made because of inadequacies in the information
supplied, but these were regarded as providing a sufficient degree of accuracy given
the position on the business cases (see para 3.3.8).
Business Case Appraisal
The figures emerging from the financial evaluation were input to the BA and POCL
business case models. The results showed that both sponsors’ business cases were
substantially non-viable, and resulted in the presentation to the Sponsor Directors
Group meeting described at 3.4.
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r ) 3.4, Presentations to Sponsors
3.4.1. A presentation to sponsor commercial teams had been pre-arranged for 28 March in
order to present initial findings and to focus the teams’ attention on any new
BA/POCL commercial issues thrown up by the nature of the tenders. Very few such
issues were identified, and these were of a minor nature. However, it was concluded
that there was value in holding the presentation in any event, and in view of the
emerging position on the business cases the Sponsor Directors Group (‘SDG’) agreed
that they should also meet that day to receive an abbreviated version of the
presentation together with the Programme’s proposals on progressing the
procurement.
3.4.2. The SDG agreed that the Core Negotiating Team (‘CNT’) should:
(a) _ invite all suppliers to identify major cost drivers;
(b) negotiate a revised ‘package’ with each supplier aimed at bringing costs to a
level that would make the business cases viable;
@
(c) put the packages to SDG for their agreement in principle;
(d) if SDG agreement were forthcoming, invite suppliers to submit revised prices
on the basis of their negotiated package; if it were not, then the options of
further negotiation or of discontinuing the procurement would need to be
considered.
3.5. Negotiations with Suppliers
3.5.1. It was agreed that Keith Baines, the head of the financial evaluation team, should be
added to the CNT at this stage, given that detailed discussion of the financial aspects
of tenders and assessment of the financial impact of prospective changes were to be
key elements of the impending negotiating process.
©)
3.5.2. All three suppliers were telephoned on 29 March and invited to meetings on 1 April
to take forward the remit given to CNT by the SDG. They were told the purpose of
the meeting and asked to prepare for it in advance.
3.5.3. At the meetings on I April the CNT provided initial comments on the tenders and
allowed suppliers the opportunity to present the work they had done thus far
following the phone calls on 29 March. They were asked to submit the final results
of their work by 4 April and were handed a letter summarising the purpose of the
meeting and the way ahead. An example of the letter is at Annex E.
th aa
3.5.4. Submissions were received from all three suppliers on 4 April. After individual
consideration of the responses, the Programme Director chaired a CNT meeting on 9
April to determine the negotiating strategy for the impending meetings with
suppliers.
3.5.5. Meetings were held with suppliers on 10 - 12 April to explore further the responses
@ received on 4 April and to negotiate in principle a package designed to substantially
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reduce the service costs to sponsors from those flowing from the tenders lodged on
21 March. Suppliers’ considered responses to the points raised in the discussions
were received on 15 April.
3.5.6. The results of the negotiations, including the responses received on 15 April, were
put to SDG on 16 April and their views sought on the acceptability in business terms
of the prospective changes. Invitations to retender on the basis of the negotiations,
the supplier responses and the SDG decisions were issued to suppliers on 16 April;
tenders were required to be submitted by 22 April.
4. EVALUATION OF RE-TENDERS RECEIVED ON 22 APRIL
4.1. Approach taken
4.1.1. Dhe TTR ‘letter expressed a strong preference for tenders that were compliant with the
revised draft contract that resulted from the negotiations and SDG consideration but
allowed one variant bid. For the purpose of the retender a variant bid was any bid
which was not compliant, and could include any variant elements the supplier might
wish. A commitment was given to evaluate all bids, whether compliant or variant.
4.1.2. It had been agreed by the Programme’s legal advisors prior to receipt of retenders
that, given the terms of the ITR, evaluation should start immediately on all retenders,
i.e. there was no need for an initial examination of the kind carried out on the tenders
received on 21 March.
4.1.3. Retenders Were received ‘from ‘all three ‘suppliers on'22"April. “All three were variant, °
displaying varying degrees of non-compliance with the ITR. They were subjected to
the process described in PWKP4-9, tailored to the amount and type of information
received. Clarifications, where necessary, were sought from suppliers.
nities
4.1.4. Asa result of one supplier submitting additional, unsolicited information in response
to the ITR after the permitted deadline, all suppliers were informed in writing that
such information might not be taken into account.
received has not formed part ofthe evaluation process
4.1.5. Although all retenders contained pricing information, the members of the teams
undertaking the Technical, Contracts, Partnership and Value Factor reviews were not
exposed to the results of the financial evaluation until they had completed their
activities.
4.2. Assurance activities
Technical Assurance
4.2.1. This was found to be necessary, given the changes in supplier positions in some areas
from their pre-ITR position. No purely technical ‘obstacles to” award were folind. /
However, a number of issues were identified for feeding into the Contract Assurance
review and the team re-assessed the Demo Stream Value Factor scores (see paras
4.2.6 and 4.2.7).
~seiaiscasaaiai asec
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Contracts Assurance
4.2.2. Extensive activity was needed in this area given the number and type of non-
4.2.3.
4.2.4.
4.2.5.
4.2.6.
4.2.7.
Sl.
compliances across the tenders. A separate report (PWKP4-40) details the results of
this review, and a summary is given at section 5. In addition, the team re-visited the
Contracts Stream Value Factor scores (see paras 4.2.6 and 4.2.7).
Partnership Assurance
This was carried out in parallel with the Contracts Assurance described in para 4.2.2.
No changes were identified compared with the position identified previously
(described in para 3.3.4).
Financial Evaluation
Extensive work was carried out in this area, using the financial models approved
prior to tender receipt. A separate report (PWKP4-43) was produced and is
summarised in Section 6.
Business case Evaluation
The results of the financial evaluation were used to update the BA and POCL
business cases. The results of these activities are beyond the scope of this report.
Value Factor Assurance
As a result of the findings of the Technical and Contracts assurance activities, both
the Contracts and Demo streams wished to re-assess suppliers’ scores under the ten
non-monetary value factors. The Evaluation Team acknowledged that caveats might
be placed on the results, given the exposure of the assessors to pricing information.
However, having taken legal advice, it wasifeltthatthe
change generated by the n
April; the penser Seaueas not need to
Programme assessment review was held on 25 i ci and the results are detailed i in
PWKP4-41. The scores were input to the evaluation of non-monetary factors
described in Section 7.
RESULTS OF THE CONTRACT ASSURANCE REVIEW
The full results of this review are set out in PWKP4-40:
(a) Each retender was compared with the corresponding ITR to establish the
degree of compliance. The results were structured around the decisions given
by the SDG on 16 April, supplemented by details of non-compliances in areas
additional to those considered by SDG.
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Dene
6.
6.1.
6.2.
6.2.1.
(b) given the importance of thejifiraudieleniént a description of each supplier’s
position was drawn up;
(c) the other - key contractual differences between suppliers were identified -
at end
implied Pc pec and limits of li
(d) non-compliances with the ITR have been costed where possible, on a basis
agreed between the Contracts and Finance teams, but where non-compliances
could not be costed, views on the risks to the Contracting Authorities were
recorded;
(e) asummary of the overall Contracts view was produced.
The principal conclusions of the review are set out below:
(a) on fraud, Pathway represents by far the best value in terms of the scope and
breadth of cover for non cardholder verification fraud and its acceptance of
some cardholder verification fraud related to the use.of. extra screens at post
office. In addition, it alone accepts the onus of proof and that it is clearly liable
for other fraud. The offers from the other two Service Providers are so
restrictive in scope and/or liability that they are difficult, if not impossible to
accept;
(b) in terms of the other (four) key contractual a Baer Pathway are
compliant on all four, IBM on three and Cardlink are e not compliant on any;
(c) in terms of contractual’ acceptability against the guidance given by the
sponsors, Pathway is a clear winner, with IBM some way behind and Cardlink
somewhat further;
(d) _ in terms of award of contract, Cardlink should not be awarded the contract at ”
any price; Pathway should be preferred to IBM unless IBM’s bid offers a
considerable price advantage.
RESULTS OF THE FINANCIAL EVALUATION
Introduction
This section provides a summary of the results of the financial evaluation
documented more fully in the financial evaluation report, paper PWKP4-42, attached.
The summary is repeated verbatim in the full report.
Full Life Costs
The results of the relative costs of ownership of the tenders (comprising supplier
charges and differential costs attributed to make them comparable) for the best view
business workloads are shown in Table 1. These are shown as net present values
(NPV) for the life of the contract discounted at 6% and 12% per annum. The table
also shows the outline costs, not discounted, for the roll-out and initial Steady State
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services (from contract award to February 1999) and the average annual costs for the
Steady State services.
Table 1 - Full Life Costs with Best View Workloads
Figures in £m Cardlink IBM Pathway
Full Life Costs: NPV 6% £1257m £992m £1041m
Difference (% of lowest) 27% 0% 5%
Full Life Costs: NPV 12% £977m £775m £819m
Difference (% of lowest) 26% 0% 6%
Roll-out £242m £208m ~~ £238m
(total of 1996/7 - 1998/9)
Steady State typical year £237m £183m
(average 1999/00 - 2004/05)
6.2.2. These figures show that JBM and Pathway offer substantially lower 3 ea
y:
Cardlink at the best view wo i costly. is
around 5% lower cost . The difference is less in the steady state than
during roll-out, reflecting the fact that Pathway’s costs reduce year-on-year in both
money and constant price terms, while IBM’s money prices’ \incteasé\\over the
contract due to partial RPI-linking.
6.2.3. Differences in the pricing structure result in a different split of these costs between
sponsors as shown in the following table:
a
t
»
&.
Figures in £m Cardlink 1BM Pathway 5
Full Life Costs: NPV 6% I. ;
BA/SSA 847
POCL 410
Total 1,257 ooo"!
6.2.4. I The next sub-sections drill-down to give explanation of:
(a) _ the make-up of supplier charges
(b) the main attributable costs that have been added to the charges to derive the
above NPVs
(c) _ sensitivity analyses
(d) conclusions of the financial evaluation.
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6.3. Supplier Charges
63.1. SaaS unmet ‘have submitter tenders: wit ycharping structures based Son the
© I charging mechz “There are differences in their approaches evident in
the differing positions in terms of providing set prices for all or only a proportion of
optional and additional transactions and setting caveats against guarantees and
transaction volumes.
The NPV of the supplier charges over the life of the contract are shown in Table 2.
While these illustrate the payments due to each supplier for the best view workloads,
these figures are not directly comparable as different supplier solutions and contract
terms have differing associated costs of ownership (discussed in section 6.4. below).
Table 2 - Supplier Charges with Best View Workloads
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Figures in £m Cardlink IBM Pathway
Supplier Charges:
¢ NPV6% 1,111 906 904
e NPV 12% 864 708 714
The Cardlink price is subject to significant uncertainty because their tender omitted
information on discount bands which is required in order to calculate the price for the
option in their tender which is nearest to meeting the sponsor directors’ brief for the
re-tendering exercise.
To illustrate the composition of the suppliers’ charges, Figure 1 shows the total
charges for the component services over the life of the contract.
sa I
ae I
400
= ere
= 300
& at Carding I
joe
F450 I Pathway I
100
50
swo
svd
38
100d 4840,
eqeinquny
va
ergeinquny
100d
Figure 1 - Composition of Supplier Charges (Average Year)
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6.4.3. Te thay os ai i
®
6.4.
6.4.1.
@
6.4.2.
>
w
6.5.
6.5.1.
®
‘ion fr consis in Pay’ id whee
ot =
Although Cardlink’s charges are consistently higher than the both of the other
suppliers, the higher charges are particularly notable in the Card Management area.
in a smaller proportion of BA’s total costs being charged via a POCL.
Attributable Costs
The following summarises the attributable costs for each sponsor.
Table 3 - Attributable Costs
Figures in £m Cardlink IBM Pathway
BA & SSA 6% NPV 102 53 91
12% NPV 78 41 ; 69
POCL 6% NPV 44 33 46
12% NPV 34 ieee, Baca
Total 6% NPV 146 86 136 j
12% NPV 112 67 105 i
The main cost areas included are: j t
(a) Card Issue charges omitted from Cardlink’s tendered price;
(b) higher stationery costs of Pathway’s solution for benefit receipts; ;
(c) HigRSRSANRAT RSG HAZ TOP PaRRWAy compared to the otbersunpliers; /
(d) differences in contracted transaction times, with ay’s being Significantly —
authorities in IBM’s and
isting BA contracts rather then usi
could reduce costs by around ‘f6m per anni
the 6% NPV and £23m in the 12% NPV iF cobta.
Sensitivity Analyses
Sensitivities of the costs to changes in key assumptions have been tested. The
following results are worthy of particular attention.
<tr
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6.5.2.
6.5.3.
6.5.4.
6.5.6.
Benefit Transaction Volumes
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Cardlink IBM Pathway
10% increase BA +3.1% BA +2.9% BA +3.2%
POCL -0.5% POCL -1.6% POCL -0.7%
Overall -1.9% Overall +1.0% Overall +1.8%
10% reduction BA -3.2% BA -2.9% BA -3.3%
POCL +0.5% POCL +1.7% POCL +0.7%
Overall -2.0% Overall: -1.0% Overall -1.9%
This shows that the variability of IBM’s charges with benefit payment volume is
around half that of the other two suppliers. This is achieved by setting a discount
band break at the guarantee level which achieves a money guarantee of over 90%.
Extent of Automation of Other POCL Transactions
If only the Basic POCL transactions were to be implemented, charges would change
as follows:
Cardlink IBM Pathway
BA Charges +0.7% +0.6% +0.8%
POCL Charges -17.15% +2:01% “991%?
This again shows the impact of the high revenue guarantee generated by the IBM
pricing structure: Achieving the Cardlink price reduction at that level must be
doubtful given the condition in their bid which they could use to trigger a review of
prices if POCL withdrew any of the Optional transactions from the guarantee, or if
volumes of work through the system differed from current forecasts.
POCL Volumes
The pattern is similar to BA volume chafigéspiwith IBM’s prices being significantly
less variable than those of the other suppliers, At the low-line forecasts, Pathway and
Cardlink total charges would reduce by around 11.5% while IBM’s would only be
reduced by 5.6%.
BA and POCL Volumes both Reduced.
Again, IBM’s prices are less variable than those of the other suppliers, also their
pricing structure has the notable effect of increasing BA’s total charge in these
circumstances even though the BA volumes are lower. In this scenario, charges to
H
a
t
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BA would reduce by 2% for Cardlink, reduce by 1% for Pathway and increase by 5%
for IBM. POCL charges would reduce in all three cases, by 37% for Cardlink, by
35% for Pathway and by 25% for IBM. Overall charges reduce by around 13.5% for
Cardlink and Pathway and by 6.7% for IBM.
6.6. Financial Conclusions
6.6.1. I The analysis shows that Cardlink are significantly more expensive than the other two
suppliers for a service which approximates to sponsors’ requirements for the
retendering.
6.6.2. On supplier prices, there is little difference between IBM and Pathway. IBM is
marginally lower cost at best view volumes but becomes more expensive at lower
volumes. Above 110% of best view the IBM price is uncertain as they have not
provided pricing information.
6.6.3. The IBM pricing structure achieves an income guarantee for them of over 90%.
6.6.4. _ IBM has lower attributable costs than the other two suppliers and this makes the total
cost of their offer lower than that from Pathway. However, there could be a
significant increase in the attributable costs as a result of the shift of burden of proof
of fraud to the authorities which is still being investigated, and there are major down-
side risks as a result of the lower fraud liability limit and the annual limit of £50m for
supplier’s liability in the event of complete failure of the service.
6.6.5. Overall, therefore, Pathway and IBM are clearly lower cost options than Cardlink,
which is not only the most costly of the offers but also has the highest risks of
subsequent cost increases as a result of price review triggers.
6.6.6. Pathway appears to be around 5% more costly than IBM at best view workloads, but
there is a greater degree of certainty about the Pathway prices than about those of the
other suppliers Also, the overall cost of the Pathway solution may be reduced by ,
around £6m per annum by alternative sourcing of benefit receipt stationeryg; This
would make if the lowest cost option.
6.6.7. There are significant down-side risks associated with IBM’s limits on fraud and
general liability. IBM’s position relative to Pathway may worsen as a result of
additional attributable costs resulting from the changed burden of proof of fraud.
7. THE VALUE ASSESSMENT AND FINANCIAL RESULTS
oe
sett
7A. Process
7.1.1. The treatment of Value Factors, including the weightings and sensitivity analyses to
be applied to the scores in the evaluation, is described in paper PWKP4-5, issue 3.0
dated 30 November 1995 ‘Use of Value Factors in final evaluation & selection’.
This paper was agreed by the Procurement Board late last year and lodged the
Programme lawyers prior to receipt of tenders.
ible beng
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7.1.2. The process of arriving at the Programme scores prior to receipt of tenders is
described in paper PWKP4-25 Issue 1.0 dated 11 March 1995 ‘Supplier scores in
respect of Value Factors’ approved by the Evaluation Board on 14 March. The pre-
tender scores themselves are contained in paper PWKP4-22 Issue 2.3 dated 20 March
‘Programme Value Factor Assessment - 7 March 1996’ and associated papers.
7.1.3. The process for re-assessing the scores after receipt of tenders, together with the
resultant scores, was as described in paper PWKP4-33 Issue 1.0 dated 11 April
‘Programme Value Factor Assessment - 26 March 1966’ approved by the Evaluation
Board on 19 April.
7.1.4. The process for re-assessing the scores after receipt of retenders, together with the
results and rationale, is described in paper PWKP4-41 attached.
7.1.5. The table below shows the weights which the should be
applied to the scores to represent the joint BA/POCL perspective of their importance,
together with the agreed ‘sensitivity’ weights to reflect each sponsor’s particular
perspective.
[_ Joint I BA I POCL
Characteristics
1 Customer Acceptability 30° 30-4 30
7 Flexibility 20 20 20.
9 Reliability and Support 20 25 1b
6 Innovation 15 io I ™aQ
2 Staff / Agent Acceptability 15 15 15 {
Viability i
3 Fraud-Frée Method of Payment 30
4 Credibility of Delivery 20
8 Management Capability 20 ‘
5 Start-Up See be
10 Stability and Coherence 15
Note: underlined figures denotes changes from joint weights
igh asta
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7.1.6. The meanings of scores most relevant to the results shown in section 7.2 are:
The service provider’s proposal _ raises
significant concerns. While these are not
sufficient to make the proposal unacceptable,
they question the likelihood of the service
provider meeting all the baseline requirements
(in the way proposed).
2 Poor
4 Ordinary
6 Good
The service provider's proposal is viable but
nothing special. It probably has some
outstanding issues, but these are relatively minor
and/or manageable.
The service provider’s proposal demonstrates a
basically sound solution with no significant
issues.
7.2. Results
7.2.1. The scores resulting from the assessment of 25 April are shown below. The layout
reflects the pre-tender agreement that the factors would be categorised as either
‘Characteristics’ or ‘Viability’. Viability would consider the soundness of the
essential services in terms of the internals of the service delivery, while
Characteristics would look more at the external factors affecting the potential success
of the services.
I Cardlink I IBM I Pathway
Characteristics
1 Customer Acceptability 5.8 33 5.3
7 Flexibility 47 42 4.4
9 Reliability and Support 5.3 5.2 4.5
6 Innovation 5.3 5.8 5.4
2 Staff / Agent Acceptability 6.0 5.0 5.5
Viability
3 Fraud-Free Method of Payment 55 5.4 4.0
4 Credibility of Delivery SF 5.5 4.1
8 Management Capability 47 4.5 37
5 Start-Up 5.4 $1 44
10 Stability and Coherence 6.2 6.0 44
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@ 7.2.2. These can also be depicted by means of a ‘radar chart’. The optimum result for a
T23s
724,
7.2.5.
28 April 1996
supplier is to achieve a large well-rounded shape, i.e. one in the upper reaches of the
scores with a degree of consistency throughout:
Customer Acceptability
Innovation Management Capability
-o-Cardlink —
-o- IBM
—«- Pathway
Staff / Agent Acceptability
Stability / Coherence
Figure 2 - Value Factor Assessment
Applying the pre-agreed ‘overall’ weights to the scores gives the results shown
below.
Cardlink
Characteristics 54
‘Applying the sensitivity weights to the scores does not change any of the
in
iat sca
The results have been plotted on a grid (Figure 2) as envisaged in PWKP4-5 to
identify the suppliers according to their position in the financial evaluation and to
show their relative standing in terms of weighted scores against Characteristics and
Viability. Thus the identities of the suppliers on the grid are:
1 IBM
4 Pathway
3 Cardlink
ini
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0] 4]
Good:
Opportunity
J 3
2
Characteristics ee a a
Geel value, but ... High Potential
“4
Poor: a ee
Low potential Unacceptable Solid, but ... i
\*0)
8.1.
8.1.
Poor; ————————» Good:
Doubts Viability Sound
Figure 3 - Value Assessment Grid
OTHER AREAS RELEVANT TO THE EVALUATION
The purpose of this section is to consider two aspects that allow the results of the
contract assurance activity, the financial evaluation and the value factor assessment
to be considered in their full perspective.
Risk Transfer
Risk transfer was been considered throughout the evaluation and the results are
reflected in the contract assurance, financial and value factor reports. It was also
necessary to consider the degree of risk transfer achieved in relation to the
acceptability of the prospective contracts in PFI terms. Particular emphasis was
placed on the need for confirmation that iSKUKHG"BESH"Hanistetted inthe areas of
fraud, commissioning, volume changes and inflation. ‘The assessments below have
taken account of discussions with Treasury and the PFI unit in a non-supplier
specific environment.
The suppliers’ position on five major elements of PFI compliance is summarised in
the following table:
Se ieee ond bt
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Gx. (eR fate Te acer
Supplier
Cardlink 1BM Pathway PFOA
i] ? x v
Onus of proof on I Tight limit of £0m pa for ines
Authorities. non cardholder verification
No cardholder verification I fraud. ener
fraud. Zero for_—_ cardholder Rudess
No cover for unactioned stop I verification. baervd a Te
notice.
3 Commissioning 7 7 7
Risk in delays etc.
3 ‘Volume Change Risk x x v fear at
Requires volume verification I Requires 92% of revenue to I Relief for changes to b
atend of yegr I of rollout. I be guaranteed. benefit frequency. This is KRo7y
nd acceptable.
7 Taflation ms x 7
RPI -1% pa offered. RPI protected. ‘Accept RPI increases up to Guace
Charges will increase Charges will increase 6%; share these above 6%
with Authorities.
3 Operate the system fo agreed % 7 7
ae aa
8.1.3. Taking the three suppliers in anticipated order of acceptability:
(a) _ It is expected that the prospective deal with Pathway would be regarded as PFI- 3
compliant;
(b) The position on Cardlink is less clear than that for Pathway, but it is thought
probable that PFI compliance would be accepted;
(c) It is not considered that the IBM deal would be regarded as PFI-compliant, (
ie piDsS wren
given the company’s position on fraud risk, the inbuilt RPI protection
mechanism and the high (90%) revenue guarantee.
8.2. Partnership Capability
8.2.1. As mentioned in section 3, the tender material was compared with the commitments
obtained at meetings with suppliers last year. In summary, Cas position was —
unchanged, IBM showed some reduction in commitment an
improvement in commitment. However, all three suppliers ccataned to fale a
satisfactory showing.
8.2.2. _ The review of the retenders showed no change from this position.
5
a
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@ 9 ANALYSIS AND CONCLUSION
9.1. The following group, which the evaluation team considered a suitable representation
in terms of function and organisation, met on 26 April to consider the results of the
evaluation and reach a conclusion:
. Dave Miller CNT POCL
. Pat Kelsey CNT BA/DSS
. Robert Albright CNT POCL
. Tony Johnson Demo/
Technical BA/DSS
~ . Stuart Riley Financial BA
~ + Keith Baines Financial POCL
9.2. It was assisted by:
. Hamish Sandison Lawyer Bird & Bird
. Derek Selwood Facilitator Kermon
. Nick Richardson Facilitator Kermon
9.3. The group considered the results from the various streams of activity feeding into the
evaluation:
(a) ‘the Contracts Assurance review ranked the suppliers in the order Pathway, »
IBM; Cardlink.t-considered that Cardlink should not be awarded the contract
a at any price, because of its unacceptable degree of non-compliance with
w contract requirements. Pathway should be preferred to IBM unless IBM’s bid
offered a considerable price advantage.
neers
(b) the Financial Bee test ing fo considered both direct and indirect cost
implications, BM with the lowest
‘sufficiently close for the two to be regarded as virtually ‘equal 2 both Overall and
fromthe’ standpoint ‘Of BA™and’POCL® Cardlink were significantly more
expensive than these two.
(c) the Value Factor re-assessment had ‘shown a close: match between the three
Supplies An sets 0 the graeme facsory effecting stat ‘customers (¢:g.
customer and staff acceptability), the order within that being Cardlink, IBM
and Pathway. On ‘internal’ factors covering the soundness in terms of servi
_ delivery (e.g. stability and coherence, fraud-free method of payment) the ord
was again Cardlink, IBM and Pathway, with the first two being significant;
* ahead of the third.
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9.4.
9:5)
9.6.
2:7,
9.8.
9.9.
10.
10.1.
(d) the Partnership Assurance review had concluded that all three suppliers were
judged to be satisfactory future partners with POCL in generating new
business.
(e) the Risk Transfer Assurance review had concluded that the deal with
Pathway would be regarded as PFl-compliant, that the position of Cardlink was
less clear cut but would probably be regarded as acceptable but that the IBM
position was thought to be unacceptable in PFI terms.
The group considered that Cardlink should be eliminated from further consideration
at this stage. It ranked first on the Value Factors and was thought to be PFI-
compliant, but was significantly behind the other two on costs and its bid was
regarded by the Contracts Assurance review as one that was unacceptable.
As to IBM and Pathway, IBM’s tender showed the lowest cost of service but the two
were sufficiently close to be regarded as equal on price. They were virtually equal on
the ‘external’ value factors, but IBM were clearly better on the internal value factors.
If these two areas were the only ones to be considered then the balance would be in
favour of IBM.
However, there were significant shortcomings in IBM’s tender arising from the
Contracts and Risk Transfer’ assiifatice activities. The Contracts review had
recommended that IBM needed a significant cost advantage to be preferred to
Pathway, and in doing so had drawn special attention to the IBM stance on fraud risk
transfer as being one which had previously been rejected by Sponsor Directors. The
Risk Transfer review had concluded that the IBM bid would not be regarded as
acceptable in PFI terms.
The group recognised that an award to Pathway would imply a need fora proactive
management stance by sponsors, notwithstanding the improvement noted by the
Contracts Stream since the restructuring, immediately prior to ITT issue. [fWOiild®
"to Work closely ee
their retenders most of this w Ne anaeeEcE
Whilst acknowledging the implications of selecting Pathway, the group considered
this a far preferable prospect to the consequences of awarding to IBM (in the unlikely
event of their being regarded as PFI-compliant), given IBM’s stance on fraud risk
transfer and other factors, most notably limited liability.
The group therefore timamimously concluded that it should recommend to the
Evaluation Board that any contract award should be made toWRathway: :
RECOMMENDATION
The team recommends to the Evaluation Board’ that Pathway. be awarded ‘any
contract, .
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ACT
ARTS
CAPS
Card authentication
Cardholder verification
ANNEX A - GLOSSARY
Automated Credit Transfer
Association of Retail Technology Standards (used in context of
standard data models for EPOS)
Customer Accounting and Paynicnts System
The processes and systems that support the accurate identification
of cards.
The processes and systems that support the accurate identification
of individuals using a card.
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CIs Counter Interface Service
® CMS Card Management Service
ECCO Electronic Cash Registers at Counters (existing POCL system)
EPOS Electronic Point of Sale
ESNS Electronic Stop Notice System, currently provided on ALPS
(Automation of London Post Offices)
IPR Intellectual Property Rights
ITT Invitation to Tender
OBCS Order Book Control Service, migrated functionality of ESNS to be
provided over the proposed POCL computer infrastructure.
Fn PAS Payment Authorisation Service
~ SSR Statement of Service Requirements
TMS Transaction Management Service
Watermark Trademark of Thorn Secure Science (used to support card
authentication)
<s]
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@ ANNEX B - MEMBERS OF EVALUATION TEAM
Financial
Stuart Riley BA/DSS
Keith Baines POCL
Martin Gill PA Consulting
Ian Robertson PA Consulting
Daniel Ratchford PA Consulting
@ Guy Pigache Charterhouse Bank
Trevor Nash BA
Mick Jeavons POCL
Marian Ireland POCL i
Bill Lavery. POCL i
Martin Vosper POCL ;
Stephen Woolley POCL
&> 4
we Mark Dunkley BA
Duncan Greer SSA /
Dick Harber BA :
Kevin Lawrence BA
Hilary Manning BA
Jan Martin BA I
Brandon Walder BA I
8 t
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Contracts
Dave Miller POCL
Pat Kelsey BA/DSS
Robert Albright POCL
Hamish Sandison Bird & Bird
Peter Elliott Bird & Bird
Technical/Demo/Requirements
Tony Johnson
Michael Berg
Colin Oudot
Jeremy Folkes
Torstein Godesth
Facilitators
Derek Selwood
Michael Purchase
Nick Richardson
Alan Fowler
BA/DSS
PA Consulting
BA
POCL
POCL
Kermon
Kermon
Kermon
Kermon
oe
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ANNEX C - DEFINITION OF PRE-ITT HURDLES
The definition is reproduced from paper PWKP4-8, ‘Pre-ITT Hurdles’
Any service provider invited to submit a best tender must have cleared a number of
“hurdles”. The Stage 3 work and the commercial assessments will assess whether the
following conditions are met:
(a) Service Requirements
The minimum service requirements acceptable to the sponsors as identified in
the requirements catalogue; this includes:
is
iii.
vi.
vii.
viii.
customer acceptability: make sure customers perceive no material
worsening in services from POCL; and the new benefit payment service
is likely to be acceptable to all customer groups who choose to be paid
their benefits at post offices;
staff / agent acceptability: the services are likely to be acceptable to the
system users comprising BA and POCL staff and agents;
fraud-free method of payment: “SASure’
significantly improve on prevention of fraud
the proposed services meet the minimum requirements specified in the
requirements catalogue with respect 0 aoa, , transaction
process & system response times, reliability and flexibility;
the provision of full accounting reconciliation and audit facilities,
consistent with recognised accounting practices;
the provision of arrangements for making emergency payments in the
event of system failure; and ensure the financial impact and speed with
which full services are reinstated are acceptable;
the ability to make one-off payments at short notice (within the service
levels specified in the requirements catalogue);
the capability of the proposed systems (and services) to enable POCL to
automate all its clients products and to use automation to develop new
services in line with its greater commercial freedom;
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(b)
(c)
(d)
ix. provide for the automation of all post offices in some format, achieving
minimum levels of automated business within a reasonable timeframe,
ensuring the overall coherence and accountability of post office services;
x. _ the service provider has adequate management and technical capability to
develop and deliver the proposed services t
concerns about the viability of the proposed services identified n the
“SPRR by the Demonstrator).
Partnership
The minimum requirements for partnership with POCL and the development of
new business opportunities (as described in the Prospectus and the SSR). This
includes ensuring that there are no major concerns relating to:
i. the ability of the service provider to support POCL in identifying and
prioritising automation options following the initial automated
transactions;
ii. the likelihood of the service provider developing a successful commercial
relationship with POCL, initially in the role of supplier to POCL with
potential to develop closer commercial ties leading to joint ventures if
appropriate;
iii. POCL retaining control of its commercial planning and the products
offered at post offices.
Risk Transfer
Sufficient transfer of risk for an acceptable risk profile, in particular for the
fraud risks and system errors but also for the general service development,
operation and business volume risks;
Commercial Aspects
i. an acceptable funding method and financial structure;
ii. acceptable financial guarantees in the event of catastrophic system
failure;
iii. satisfactory termination arrangements that avoid lock-in;
iv. agreement to a common charging structure;
v. POCL to retain control of its critical operational processes, and of its key
commercial relationships (e.g. clients and agents);
vi. no material damage to the Post Office brand.
ats seis
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(e) Service Provider Risk Register
No Category ‘A’ risks and an acceptable profile of other risks*.
(f) Contract
A draft contract acceptable to BA and POCL*.
* failure to meet any of the conditions (a) to (d) should trigger failure at (e) or (f); however, a
supplier passing (a) to (d) but still failing (e) or (f) for some other reason would not receive
the ITT
I
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